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China’s most popular selfie application maker Meitu’s plan to raise funds from an initial public offering in Hong Kong could face pricing hurdles as investors are still doubtful whether the Xiamen-based company can monetise its services to justify its high valuation.

Meitu, founded in 2008 by entrepreneur Cai Wensheng, has been making apps that enable users to “beautify” their photos and videos by smoothing skin, brightening eyes or even virtual “try-on”. The company, which also sells smartphones under the Meitu brand, has about 450 million monthly active users (MAU). In addition, its apps have been ranked top among photo and video apps in China according to iOS download ranking.

The company aims to raise about US$750 million, according to an offer document viewed by the Post, which would make it the largest tech initial public offering in the city since Alibaba.com’s float in 2007. Alibaba owns the South China Morning Post. The planned IPO would give Meitu an estimated valuation of about US$5 billion.

But valuation is still the stumbling block that Meitu may encounter when it meets potential investors in Hong Kong, Singapore, London, New York and Boston in the two weeks till December 2.

“The valuation is quite expensive,” said Eddie Tam, chief executive of Hong Kong-based hedge fund Central Asset Investment, who has not decided whether to invest in Meitu or not. “It is still losing money and its revenue mostly comes from selling smartphones.”

Though the Meitu IPO might still be a big draw for the Hong Kong stock market, considering that the bourse has not seen any major tech listings recently, investors are concerned that the app developer is yet to find the right business model to monetize its huge user base.

The valuation would be much lower, if the company is just viewed as a mobile tool or hardware maker, with no potential of growing into a powerful social platform, said Tam, citing US-listed tool application Cheetah Mobile, which has 6 million MAU and a market value only US$1.5 billion. He also cited the example of Hong Kong listed mobile phone company Coolpad which is worth about HK$4.2 billion (US$540 million).

Meitu has been posting losses for the last three years, according to its preliminary prospectus. Its loss continued to expand and reached 2.2 billion yuan (HK$2.5 billion) during the first six months of this year, as its limited smartphone sales could not cover its huge marketing and R&D (research and development) costs.

“Meitu is likely to face fierce competition as its functions are not that unique,” said Dickie Wong, executive director of research at Kingston Financial Group. “Even its flagship MeituPic or Meipai can be easily copied by others.”

Meitu chairman Cai, however, is banking on building communities of female users and generate profits from related online advertising and e-commerce.

The developer launched a fresh chat application “Shanliao”, which is similar to Snapchat, in October in a bid to increase user engagement and stickiness. The company said it plans to start an e-commerce platform in the first half of 2017.

But analysts aver that there are still no visible signs that the company could make profit from its internet services.

Tam from Central Asset Investment goes one step further by saying that Meitu’s transition came a bit “too late”, as China’s social platforms are already dominated by Wechat and Weibo.

Given the need to continue investing in integrating all the users and developing an advertising and e-commerce platform, we believe that Meitu may not be profitable for another three years, says Edison Lee, an analyst tracking the internet sector at Smartkarma, an independent research website.